Monday, April 11, 2011

Global financial crisis/recovery: What does it mean for Saskatchewan?

These remarks were delivered to the Saskatchewan CED and Co-operatives Conference, April 8, 2011, Mount Royal Collegiate, Saskatoon.

This is a somewhat difficult topic to tackle because as far as the global recession is concerned, Saskatchewan has weathered it rather well. If anything, our main problem may be the management of our current prosperity and resource wealth, all of which is certainly tied to the rapidity and the resilience of a global economic recovery.

Given there are so many unknowns on this issue, I will be forced to speculate based on current trends and the likelihood of potential scenarios emerging in the future. So I am certainly not offering predictions here, but rather identifying possible challenges that may arise given the uncertainty of the current global economic situation.
First off, we should ask the question of whether we are in recovery, or perhaps, recovery for whom? It is no secret that corporate profitability has reached record levels recently, so the corporate sector is certainly “recovering.” The problem is that they are reluctant to invest, sitting on piles of cash in the billions – if not trillions – of dollars awaiting the return of profitable investment opportunities.

So while corporations are doing quite well, they have not begun to make those necessary investments in plant, equipment and expansion that can create employment, at least at the national level.

Nationally, Canada’s unemployment rate currently sits at 7.8%, while SK’s is 5.7%

For aboriginal people in Saskatchewan, the unemployment rate is closer to 17%, although if on-reserve numbers were included it would be much higher.

If we include discouraged and under-employed workers, the national average is probably closer to 12%.

So it is not surprising that 59 percent of Canadians, according to a recent Harris-Decima poll, believe Canada is actually still in recession. To them, it genuinely still feels like a recession.

So I think we need to be clear of whom we are talking about when we speak of “recovery,” because it is not certain that all of us are convinced that recovery is under way.

That being said, the governments of the world seem to be convinced that recovery is underway, how else to explain the wholesale termination of stimulus packages and the focus on debt and deficits, with all the attendant calls for public austerity and spending cuts.

The danger here is that despite many of the worlds’ governments confidence in recovery, the withdrawal of public investment in favour of public austerity without a commensurate surge in private investment, will slide us once more back into recession – the notorious “double dip recession” that we have heard so much about.

So it is not a foregone conclusion that we are on the road to recovery. But let’s grant that recovery is on its way and it will eventually “lift all boats” as it were.

What does this mean for Saskatchewan?

All mainstream forecasters see SK leading the way in economic growth for the country over the next year.

Commodity prices appear to be on the rise, particularly oil, food and potash, so we can expect the province’s resource boom to continue – although uranium may slip if more countries like Germany postpone or scrap a new generation of nuclear reactors in the wake of the Fukushima disaster.

So as I mentioned, it seems that Saskatchewan’s main challenge in the coming years will be our ability to manage economic growth so as to ensure that the more vulnerable segments of our society do not get left behind.

Certainly, Saskatchewan’s prosperity has not been universally shared. Despite posting record economic growth and higher employment numbers than the rest of the country, our province is the owner of some rather dismal social indicators.

Income inequality: The richest in the province are getting richer while the rest of us are either stagnating or falling further behind. We currently have the third greatest after-tax income inequality in the country.

Poverty: According to the University of Regina’s Social Policy Research Unit, there are currently 115,000 people living below the poverty line in Saskatchewan – about 12 percent of the population.

Aboriginal people fare far worse, with 37% living below the poverty line.

We have a higher rate of child poverty than the national average at 15.6%, which means over 33,000 children in our province live below the poverty line.

We also share the dubious distinction with British Columbia of having the worst early childhood poverty rate in the country with close to 20% of children under six years of age living in poverty.

Food bank use in Regina and Saskatoon has increased a dramatic 20 percent in the last two years.

Housing: It’s no secret that we have an acute affordable housing crisis in the province, with low vacancy rates and lack of regulation allowing rents to skyrocket over the past few years.

So from October of 2008 to October of 2010, rents for private apartments in Regina increased by almost 20 percent. Over the same period in Saskatoon, rents increased by 12%, while Yorkton and Estevan saw the highest inflation at almost 25%.

Add to this the rising cost of basic necessities such as food, gasoline, heating and other utilities and the fact that wage inflation has not been kept up with costs and it becomes apparent that the more vulnerable in our province are feeling the effects of a tightening economic noose.

Yet, even for those in a less precarious economic position, current trends are also troubling.

Although it remains contentious, more and more economists are viewing the current inflation of housing prices in the province as unsustainable and many see a re-adjustment in the near future. Indeed, a recent Bank of Montreal report identifies Saskatchewan as in “the danger zone” due to the gap between wage growth and home prices.

Also, Saskatchewan households are increasing carrying more debt, and as a recent CGA report notes, much of this debt is not being used to purchase assets, but to cover day-to-day expenses. Effectively, credit is being used as a means to maintain many families’ standard of living.

For homeowners, a potential market adjustment in home prices and an increase in mortgage rates could seriously jeopardize the financial stability of a significant segment of the province’s middle-class.

Indeed, due to the levels of household debt that Canadians currently hold, a recent Certified General Accountants report considers over half-a-million Canadian homeowners to be at serious financial risk should interest rates approach the five percent mark.

Even a mere two percentage point rise in mortgage rates would require many middle to upper income earners to cut their expenditures by ten percent.

So while housing is increasingly out of reach for many families of limited income in Saskatchewan, the current housing boom could have an equally negative impact on the middle class as well.

If the boom continues – and it will require continued world demand for many of our resources – then our primary concern is how to manage economic growth so that it benefits all groups in Saskatchewan, not just a select few.

However, as I mentioned, it is not a foregone conclusion that world demand for our resources will continue to grow. Should we fall back into the dreaded “double-dip” recession, many of the major consumers of our resources may curtail consumption. We saw how quickly this can occur when China drastically reduced its potash consumption at the onset of the recession causing potash prices to crash back to earth and leaving our government with a substantial deficit.

So I just want to emphasize that a continued economic boom in Saskatchewan is not pre-ordained, and we should be cautious when making predictions for the future.

As I said, should the boom continue, we need to ensure that we manage economic growth and expansion in a sustainable and equitable fashion.

Now, we have a very vivid example of the consequences of un-controlled and un-planned growth right next door to us in Alberta.

Certainly, the resource-driven boom in Alberta should serve as a cautionary tale for Saskatchewan. Unfortunately, I fear we may be emulating Alberta’s trajectory in numerous ways.

The Alberta “Advantage:” A Cautionary Tale:

Some of the problems that have plagued Alberta as the result of it’s economic boom include a substantial infrastructure deficit as growth has outpaced the ability or willingness of the Alberta government to make the necessary investments in transportation, hospitals, schools and water and sewage systems. All of these are currently under tremendous strain in Alberta due to the reluctance of the Alberta Tories to control and plan for economic expansion.

Perhaps Alberta’s environmental deficit is the best-known consequence of the rapid and practically unregulated expansion of the oil and gas industry in the province – particularly the tar sands.

Government appetites for resource revenues have rendered Alberta’s environmental laws all but toothless as project after project has been approved with little if any regard for the environmental consequences. The Alberta government’s attitude towards the environment can best be summed up by Alberta Environment minister Rob Renner, who bluntly stated, “it’s not the role of Alberta Environment to advocate on behalf of the environment.”

Such candor is revealing, but begs the question whom in government is protecting the Alberta environment?

Perhaps a less well-known or talked about consequence of Alberta’s economic boom is what me might call its ‘democratic deficit.”

When governments come to rely on resource royalties for the lion’s share of their revenues, rather than on personal income taxes, it is well documented that citizens become less vigilant on how government spends money. Citizens also demonstrate greater apathy and reluctance to participate in the democratic process as they feel they have less of a stake in its decisions. So it is not surprising that Alberta’s voter participation rate is one of the lowest in North America.

Governments reliant on resource revenues are also reluctant to regulate industry for fear they will stop investing. Regulatory capture of government by industry is a real and present danger to democracy in a resource-driven economic boom.

Certainly we can see the early manifestation of this here in Saskatchewan where the current government is loathe to even consider a royalty hike on potash for fear it will impede the expansion of the industry in the province.

Fear of public scrutiny and transparency also tend to characterize governments that are overly reliant on resource revenues. Certainly Alberta’s sordid record of accountability and transparency in regards to the environment leaves much to be desired.

Finally, we can also identify a “civil society” deficit, particularly in the non-profit community, as a consequence of Alberta’s economic boom.

The non-profit sector in Alberta has been required to plug enormous gaps in public programs and services that have been gutted by the Alberta Conservatives.

Add to this the increasing need for programs and services due to the massive influx of new immigrants and workers to the province coupled with unstable and inadequate funding to deliver these services and you have a recipe for disaster.

Indeed, the non-profit sector in Alberta is experiencing an unprecedented rate of turnover in leadership and talent due to the enormous stresses and demands that have been placed on the sector.

A recent survey reports that fully 40 percent of Alberta’s non-profit leadership expects to leave their position in the next two years. Over 80 percent felt they would leave their position within the next five years.

The number one complaint driving this exodus of talent is the anxiety and uncertainty around finances that is endemic within the non-profit community in Alberta. The excessive need for fund-raising, grant writing and reporting requirements are felt to impede many non-profit’s pursuit of their core mission resulting in disillusionment and alienation among many non-profit workers.

Add to this the difficulty of attracting and keeping talented people in a boom economy where salaries in the private sector are estimated to be 50 percent higher and you have a major retention problem in the non-profit sector which delivers a whole host of programs and services that Albertans rely on.

It is only recently that Alberta has at least recognized the importance of the non-profit sector to the health of Alberta society and has moved to develop a workforce strategy specifically for the non-profit sector.

We know that many of the stresses that Alberta’s non-profit community feels are also evident here in Saskatchewan. We are already having difficulty attracting and keeping talented people in the non-profit sector here in Saskatchewan. Without an explicit strategy to try and remedy this, this problem will only become more acute in the future.

Raising awareness among the public and government of the role of non-profits in our province will be essential to addressing problems before they become unmanageable. Restoring core, stable funding to non-profits is also essential as a means to instill a modicum of certainty and stability into the sector.

Given that Saskatchewan has one of the highest citizen-to-NPO densities in the country, we cannot allow our non-profit sector to deteriorate to the extent that Alberta has. The consequences for our province of a failing non-profit community would be dire.

So we can look next door and see what the future might hold for Saskatchewan if we continue to believe that unregulated economic growth is the sole pathway to prosperity. We have a clear example of how not to manage a resource-driven economic boom right next door to us.

We need to address many of these problems before they become more prominent as economic expansion begins to strain our own province’s environmental, infrastructural, democratic and human resources.

With such a powerful example of what not to do right next door, we certainly cannot plead ignorance of the consequences should we decide to follow the same path.

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About this blog

It was in the thirties, legend has it, that an old pioneer was asked how many good years Saskatchewan farmers had experienced, “Two”, he replied, “1916 and next year”.................................................. Next Year Country was a provincial magazine published by the Saskatchewan Waffle Movement in 1972 and was issued in various forms until 1983. This blog intends to contribute, not to a revival of the Waffle movement, but to the spirit of hope and optimism it reflected. We need this spirit again.